Highlights
- Relieving committed costs, such as rent, was more important during the COVID-19 pandemic for large restaurants operating on the Chinese Mainland.
- Franchise-based and decentralised restaurant firms exhibited stronger gains in open rates, revenue, and employment than company-owned and centralised restaurants. This suggests that stimulus effectiveness favoured the decentralised organisational models.
- Rent reductions in shopping malls have a positive effect on revenue and open rates for nearby restaurants with different cuisine types, although there was competitive displacement in restaurants that offered similar cuisine types.
In this study, the researchers conducted a comprehensive assessment of the rent reduction program widely implemented in China during the COVID-19 pandemic. Using a unique and large database with detailed bill-level information on nearly 20,000 restaurants, the researchers derived details regarding the restaurants’ operational decisions and performance. The pandemic had a severe impact on the restaurant industry in China, as the outbreak and nationwide lockdown occurred during critical times of revenue generation. As a result, most restaurants experienced significant revenue drops, while costs, including rent and wages, continued.
To mitigate the liquidity crisis and debt-overhang problems the restaurants faced, the Chinese government coordinated a national-level rent reduction program in late January 2020, urging real estate companies to reduce their property rents. The goal of the program was to prevent unemployment, support small and medium enterprises (SMEs), and stabilise the economy. The rent reductions offered by real estate firms were primarily focused on their shopping malls, with more than 2,000 shopping malls across China implementing rent reduction programs.
The researchers found that political factors could have played a part, and not only restaurant characteristics, in determining the rent relief. In January and February 2020, the goals of the rent reduction program were not clearly stated by either the central or local governments. One possible goal of the central government’s rent reduction program was to support employment, and another was to help SMEs. A third possibility was that local governments were concerned that, without rent reductions, future or current-year GDP growth would be lower, which could negatively impact their political careers since GDP growth was a crucial factor for promotion.
The study adopted a difference-in-differences strategy, whereby restaurants in shopping malls that implemented rent reductions were the treatment group, and restaurants in shopping malls that did not carry out rent reductions were the controls. The sample included 19,814 restaurants, with 7,238 restaurants in the treatment group located in 791 shopping malls, and 12,576 restaurants in the control group located in 1,220 shopping malls. The resulting matched treatment group and control group were 7,238 restaurants, respectively.
The study resulted in six main findings:
- Rent reductions significantly increased the open rates of restaurants, the total revenue per restaurant, and the number of waiters employed at each restaurant.
- The marginal effect of the rent reduction was greater for larger restaurants, as larger restaurants faced higher committed costs, such as higher rent.
- Firms with more labour flexibility had a smaller treatment effect, where the number of employees measured labour flexibility. The second and third findings together indicated that the treatment effect of the rent subsidy was most notable for large firms with little labour flexibility.
- The rent reduction program generated a weakly positive spillover effect on neighbouring restaurants. Restaurants with cuisine types different from those in the subsidised shopping malls may have benefited from increased consumer traffic to the area.
- Rent reductions induced strategic responses by restaurants, such as discounts and promotions of takeout and delivery orders. Restaurants with rent reductions were more likely to invest in discount offers and expand to the delivery business.
- The impact of rent reductions was more significant for franchise-based restaurants than for company-owned ones, as decentralised firms were able to use the stimulus more efficiently because they were more adaptable than centralised firms.
The study supported the hypothesis that rent reductions increased the open rates, revenue, and employment at restaurants during the COVID-19 pandemic. The effect of the rent reduction was larger for restaurants with higher committed costs and smaller for restaurants with greater labour flexibility. Additionally, the rent reduction effect on open rates, revenue, and employment was stronger for franchise-based restaurants than for company-owned restaurants.
Rent relief also induced strategic shifts toward discounts and delivery. Restaurants with rent reductions were more likely to offer discounts and to promote takeout and delivery orders during the lockdown period, indicating that the stimulus provided both the funding and incentives for adaptation. These strategic responses suggested that the benefits of rent reductions were passed on to customers, who substituted traditional dining with takeout or delivery and received more discounts.
The researchers uncovered a great degree of heterogeneity in the effects of rent reductions associated with restaurant characteristics such as size, organisational structure, and distance to headquarters. This emphasises the need for tailored policy solutions and demonstrates key implications for the design of effective fiscal stimulus programs.
Learn more from the full research article here: